File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Vicarious Corporate Liability Of A Parent Company: Critical Analysis In Relation To Direct Liability And Lifting Of The Corporate Veil

This paper is a detailed study of the concept of vicarious liability and the provision of vicarious liability of a parent company for the acts of a subsidiary company. The primary focus of the paper lies in discussing whether a parent company should be vicariously liable for the acts of its subsidiary company.

The paper states in affirmative the reasons to hold the parent company vicariously liable along with certain suggestions. It is stated that the parent company may be held parallelly liable with the subsidiary on the grounds of its own negligence and on the basis of vicarious liability.

This conclusion was achieved after conducting a survey and comparison with various foreign case laws. The paper also states that a clear demarcation must be maintained between direct liability of a parent company as a result of breach of duty of care and vicarious liability as a result of lifting the corporate veil.

Introduction
The concept of vicarious liability and lifting of the corporate veil has been heavily debated in the recent years. In view of development of big multi corporations, the victims of the activities of these corporations must be defended appropriately. These corporations expand and branch out creating several new subsidiaries within one Country or in other Countries. Keeping this in mind, the basis for imposing vicarious liability on parent company must be clearly defined. As a principle, a parent company is not held liable for acts of the subsidiary.

There are several companies like Morgan Stanley, Google and Microsoft who maintain several subsidiaries.[1] Companies form subsidiaries either for tax reduction purposes or for developing business, expansion and growth etc. In accordance with the provisions of Company Law, a limited liability company is liable for its own acts and conducts inside the scope of the assets owned by it.

There is no specific approach which is adopted by the Courts regarding the concept of vicarious liability and piercing of the corporate veil and thereby holding the parent company vicariously liable.[2] The cases are decided individually on the basis of the facts. The Court generally take a very calculated step while lifting the corporate veil.

In the recent times, there has been immense research pertaining to lifting of the corporate veil in accordance with company law. Vicarious liability of the company for the acts of its employees has also been researched in detail. However, there is not much light that is shed on the area of vicarious liability of parent company for its subsidiary. Therefore, the aim of this paper is to close the gap in legal research nature of vicarious liability of parent company for the acts of its subsidiary. The paper also demarcates the direct liability of parent company and lifting of the corporate veil.

Literature Review
  1. Tetiana Kravtsova[3], through her paper has discussed the various scenarios of applicability of vicarious liability. Vicarious liability is a complex structure and hence, it is a compilation of both fault liability and strict liability. She has further discussed that vicarious liability involves three parties.

    The law is silent on the topic of imposing vicarious liability on the parent company. As a principle a parent company cannot be held liable for the acts of subsidiary. She has stated that the English Courts have always been extremely reluctant to hold the parent company liable.

    Despite the existence of exceptions like the sham concept which means that the Court will look into the legal personality of a company, if it can be proved that the company had no role to play in the act committed. The author has also discussed the concept of alter ego which states that the successor corporation in a merger is the alter ego of the former corporations. (2016)
     
  2. Richard H Burgess[4], through his paper has stated that the law does not specify about the parent companies' liability and hence, discusses the concept of lifting of the corporate veil pertaining to an individual company and its acts. He further states that since the law is silent upon a parent companies' liability, the ownership of stock in one corporation by another must not destroy the fabric of separate legal entity.

    Separate Legal entity is a concept that states that the corporation and its owners are different entities and must be treated as distinct entities in the eyes of law. The parent companies' liability is regulated in accordance with limited liability and separate legal entity. The autonomous legal personality of the corporation will be at risk if a concept like vicarious liability is added upon the parent company.

    In the later part of the paper, the author states the exceptions with regard to the liability of a parent company. This in turn helped in the creation of the concept of group liability. The lifting of the corporate veil is an important concept in relation to group liability and is applied only on a case to case basis. Therefore, the English Law has dealt with the concept of group liability, there is are no specific grounds for imposing this liability and it is only used on a case to case basis based on the Court's discretion. (2015)
     
  3. Sam Elson[5], in his paper describes that if parent companies are held vicariously liable, then the fundamental principle of separate legal entity is demolished. The liability of corporations is maintained according to the concept of limited liability and separate legal entity. The author has later explained the concept of agency relationship. He raised the question whether a subsidiary company is an agent of the parent company. He stated that the subsidiary company cannot be considered to be an agent because the parent – subsidiary agency requires a close business relation between the companies' in relation to the fraud that is caused.

The subsidiary company must be performing the acts of the parent company under its control in order to be held as an agent. He concludes by stating that the concept of vicarious liability of parent company will arise only when the subsidiary company is an agent or instrumentality of the parent company. (2010)

In the above review of literature, it can be noticed that the none of the past researchers or authors have delved into the theory of according vicarious liability on the parent company. Much has been written about liability of parent corporations for acts of their subsidiaries, but the material principally concludes that there is no clear law on the subject. Through the course of this paper, the author seeks to analyze and explain the reasons for holding a parent company vicariously liable for the acts of the subsidiary company even in situations when the subsidiary company is not an agent or instrumentality of the parent company in order to avoid corporate instability and irresponsibility.

In the initial times, a corporation was not held liable for a crime. However, in the recent times this view has been rejected. Arguments support that a corporation must be mandatorily held liable for the acts of a human agent who performs the act in the course of employment. In order to prove this contention, it has to be ascertained whether the existing legal concepts allow imposition of such liability. The next step is to determine under which circumstances can such liability be imposed.

A company only acts through its agents. The shareholders are the people who are punished when a corporation commits a wrong. Therefore, vicarious corporate criminal liability is necessary to impose liability on the shareholders for the acts of their agents. In situations where the criminal intent is not taken into consideration, the corporate criminal liability has been imposed since a long time. It is pertinent to note here, that the difference in the physical act and the mental intention of the agents cannot act as a barrier to impose the vicarious corporate liability.

It has been asserted that companies by their real nature are incapable of carrying out such violations as theft, assault, battery etc. In any case, courts have now advanced to the situation of perceiving that corporations can be held guilty of wrongdoings including criminal goal.

Research Question
  1. The concept of limited liability and separate legal entity are in place since time immemorial. Keeping these concepts in mind, can the parent company be held vicariously liable for acts of the subsidiary company?
     
  2. Whether it is necessary to differentiate between direct liability of parent company and lifting of the corporate veil?

Research Objectives
To state that the parent company should be held liable for the offences committed by the subsidiary keeping in view the concepts of limited liability and separate legal entity, owing to the massive control enjoyed by the parent company.

The second objective is to establish the importance of segregating or differentiating between the direct liability of the parent company caused due to breach of duty of care and the vicarious liability resulting from the lifting of the corporate veil. This is of paramount importance owing to the relation established between the two companies.

Research Methodology
The principle research and conclusions have been drawn after conducting a survey. Through the survey fifteen respondents were questioned. The respondents belong to the legal field working as corporate lawyers, advisors and academicians in different entities, like Société Générale, Wipro, Jyothi Sagar Associates. Their understanding of vicarious liability was gauged.
  They were later asked if they support the imposition of vicarious liability on a parent company for acts of the subsidiary. The questionnaire proceeded with understanding their take on whether the direct liability of a corporate should be distinguished from the vicarious liability resulting through lifting of the corporate veil.

Various reports, journals and research papers have been referred for collecting and analyzing the ideas revolving the concept of corporate vicarious liability.

Analysis
  • Basis For According Liability On The Parent Company:

    The parent company can be held liable on the basis of two grounds: breach of duty of care and the piercing of the corporate veil. A parent company that exercises control over the working of a subsidiary company, owes a duty of care on behalf of the subsidiary.[6]

    In this scenario, the parent company is said to be directly liable for its own wrongful conduct. A direct liability is owed when a breach of duty of care is caused. On the other hand, a vicarious liability is caused due to the breach of duty of care by another person. A parent company can be held liable in cases of abuse of the power of separate legal entity. The Courts can lift the corporate veil and ascertain the individuals behind the fraud. The Court can later impute the subsidiary company's conduct to the parent company and in turn hold it vicariously liable.[7]

    However, in many situations there is a failure to rightly distinguish between the situations in which the parent company is liable on the basis of its own fault, i.e., direct liability and situations in which the parent company is liable as a result of lifting of the corporate veil thereby holding the parent company vicariously liable for the acts of the subsidiary.[8]
     
  • Vicarious Liability Of A Parent Company:

    In pertinence with the present research topic, vicarious liability refers to a parent companies' liability for its subsidiary. The concept of vicarious liability was first ascertained under the tort law and this law was common to most of the ancient cultures. This law holds that an owner may be liable for the wrongful act even if his fault is not involved or he did not intend to cause harm.[9]

    The according of vicarious liability is based on the relationship between the two people. Therefore, it can be stated that the main elements of vicarious liability are (a) A wrongful act or omission by another (b) a relationship between the actual offender and the defendant on whom liability is imposed (c) A connection between the wrongful act and the relationship shared.[10]

    The first necessary element is a wrongful act or omission by another. In the present scenario, it means that a wrong is committed by a subsidiary company independently. The second element is the subsisting relationship between a parent company and a subsidiary company.

    The element of relationship plays an important role in according the liability upon the parent company. The third requirement states that a connection should exist between the wrongful act and the relationship between the two people. In the present scenario, a subsidiary company must commit an offence within the delegated authority by the parent company. This means that the offence must be in relation to an authority or power that is delegated by the parent company.[11]
     
  • Analysis Of The Survey Results:

    Question Number YES (Number of respondents) NO (Number of respondents)
    3 15 0
    4 15 0
    5 13 2
    6 12 3
    7 8 7
    The questionnaire was sent across to fifteen respondents. 100% of the respondents were aware of the concept of vicarious liability and separate legal entity owing to their education and experience in the legal field. 86.6% of the respondents stated that the parent company should be held vicariously liable for the acts of the subsidiary.

    80% of the respondents stated that the concept of separate legal entity is not violated if the parent company is held vicariously liable. However, 1 respondent who voted for the parent company to be held liable has voted that the practice will violate the principle of separate legal entity.

    Additionally, 53.3% of the respondents are of the belief that the concept of direct liability and vicarious liability through lifting of the corporate veil must be separated.

    This proves that a large majority the individuals working in Corporates are of the belief that the parent company must be held vicariously liable. This research paper will further elucidate on the rationales behind according vicarious liability on the parent company along with some real time corporate examples.
     
  • Legal Rationales Behind According Vicarious Liability:

    One of the most important legal issue in relation to imposing liability on corporations is whether a parent company can be held liable for the acts of the subsidiary. In this section of the research paper the author will be discussing the rationales behind stating that a parent company must be held vicariously liable.

    As a bedrock principle, a parent company is not held liable for the acts of the subsidiary. However, if it is stated that a parent company cannot be held liable owing to the concept of separate legal entity, then this will be a tool to promote corporate irresponsibility.[12]

    The control that a parent company enjoys over a subsidiary company is extremely high. This is because of the ownership factor. The proportion of ownership that a parent company has over a subsidiary company is extremely high and thus, it plays an important role.[13] Companies can maintain control from afar but strategically leave operations in the hands of local managers and the government.

    In the case of Hazeltine Corp. v. General Electric Co,[14] it has been argued that ownership and control cannot be a legitimate ground for imposing vicarious lability. However, it has to be noted that for imposing vicarious liability, control is an extremely essential element, especially in terms of parent company's liability for its subsidiary as vicarious liability is essentially an imposition of liability for the wrongs committed by another person.[15]

    Control helps in reflecting upon the relationship between the two companies. Relationship between the companies is the second rationale behind according the vicarious liability. In order to hold the parent company liable for its subsidiary, elements of abuse of control on the part of parent company is a necessary requirement.[16]

    In Taylor v. Standard Gas & Electric Co.[17] it was held that vicarious liability is imposed on the employer for acts of the employee because it is a general assumption that the employer is more solvent than the employee. This assumption must also apply to a parent company. It is often argued that this assumption cannot be applied as a subsidiary company is a separate legal entity encompassing its own capital funds.

    If a company is a member of a group of companies, then the primary company is regarded as the parent company which accumulates all the resources in the form of dividends and the other companies are compelled to provide support even if their financial conditions do not support the process.

    This has a negative effect on their financial position. In certain circumstances, the subsidiary company is undercapitalized by the parent company deliberately to provide a shield to the latter from any tort liability. The parent company can also use its control over the subsidiary to transfer property to itself by capital reductions or overpricing or underpricing of purchases.

    In Garden City Co. v Burden[18], a corporation owned an irrigation canal and its subsidiary that had no assets was responsible for operating and maintaining the canal. When the canal flooded, plaintiffs successfully sued the parent corporation. The Court held that because the operating company had no assets it would be inequitable to allow the parent company to escape liability under the pretext of the separate identity of two corporations.[19]

    Owing to these circumstances, a parent company is more solvent than its subsidiary. At the level of the two companies there is no such reliance between two financial units, yet even for this situation parent company has some impact on subsidiary.[20] Considering that subsidiary typically acts as a team with the parent company, with endorsement of the latter and in light of a legitimate concern for the entire gathering the subsidiary is reliant on the parent company.

    Besides, the parent as an investor might be enabled to take an interest in appointment of the directors of the subsidiary. Despite the fact that disciplinary system is characterized inside by the subsidiary, accepted parent company as an investor may impact removal of directors of the subsidiary.[21]

    The Court in United States v. Bestfoods[22] has called attention to that the Court can lift the corporate veil to hold the parent company liable for the acts of its subsidiary, if the corporate structure is mishandled to accomplish unjust purposes, most outstandingly, misrepresentation for the shareholder's benefit and the parent company is legitimately a member in an inappropriate act complained of.[23]

    Enterprise liability theory is mainstream among clarifications of vicarious liability of the employer. It depends on the idea of correspondence among benefit and burden. This theory can likewise be considered in the event of vicarious liability of the parent company. As indicated by the economic analysis theory the principle objective of company is to collect welfare for shareholders.[24]

    The parent company as a shareholder has a privilege to get profits from its subsidiary which can be considered as an advantage. Thus, trouble forced on the parent company through vicarious liability for its subsidiary might be advocated by advantage received by the parent company as profits.

    Another defense of vicarious liability is "mixed policy" clarification which incorporates all the previously mentioned justifications.[25] One should focus on the connection among parent and subsidiary company as opposed to on the connection between parent company and the victim and the objectives that would be accomplished by if liability were forced. It is obvious that vicarious liability is more complex convoluted as it might appear at the primary look. It incorporates 2-level relationship: tortfeasor-victim and parent company and subsidiary company.[26]

    Holding the parent company liable is a successful measure to guarantee full remuneration to the survivors of the criminal wrong and to make such enterprises dependable.
     
  • Need For Distinguishing Between Direct Liability And Vicarious Liability:

    It is pertinent to note that in situations when the parent company can be held liable for acts of the subsidiary, it is not always necessary to lift the corporate veil. Suitable corporate structuring stays a powerful risk mitigation strategy. Rather, we examine under a circumstance where a parent company might be subject for its subsidiary's activities while applying the normal test of negligence, including as to foreseeability, proximity and policy.[27]

    Going to the two ways to deal with the parent company's liability, for example parent company's liability for its own negligence and parent company's vicarious liability.[28] In this manner, the parent company may be held strictly liable for the wrongful conduct of the subsidiary by reason of the fact that there is an association between the real wrongdoer i.e. the subsidiary and the parent company.

    the ICJ's stance as indicated by which parent company's liability ought to be differentiated from parent company's vicarious liability isn't upheld by everybody and not every person draws clear line between them.[29] It is bizarre for the courts to recognize personal liability of parent companies based on legal rules and an obligation which is attributable to corporate veil piercing doctrine. With that in mind, many contend that in numerous occurrences it is not feasible to differentiate between the two kinds of liabilities.

    From the author's viewpoint, it is critical to distinguish these two sorts of parent company's liability according to hypothetical perspective, yet in addition practically speaking. If there should be an occurrence of the parent company's own liability, limited liability is not at stake, it might incur liability based on existing lawful grounds that apply to it similarly as these would apply to non-incorporated elements or to characteristic people.

    Besides, so as to hold the parent company liable for its own wrongful conduct an obligation of care and breach of such duty of care ought to be built up while in the event of parent company's vicarious liability for its subsidiary the connection between the parent company and its subsidiary ought to be set up.[30] Subsequently, we face with totally different grounds for liability of the parent company. The offended party bringing the action against the parent organization needs to choose which ground the respondent ought to be held liable for and thus, to prove either existence and breach of a duty of care on the part of the parent company or existence and abuse of control which parent company has over its subsidiary.[31]

Conclusion
A parent company can be held parallelly liable with its subsidiary on the grounds on its own negligent acts and on the grounds of vicarious liability. Vicarious liability of the parent company for its subsidiary is more complex than fault or strict liability. There is a relationship between the actual tortfeasor and the victim.[32]

This relationship itself is simple and involves fault liability of the subsidiary. The other element of vicarious liability is relationship between the actual tortfeasor, and the defendant. This relationship does not involve fault liability on the part of the parent company, and is in fact strict liability from the viewpoint of the latter. Vicarious liability of the parent company for its subsidiary, in particular is more complex than just fault or strict liability.[33]

It is the author's viewpoint that it is imperative to distinguish these two separate instances of liability. So as to hold the parent company liable based on its own careless lead it is important to prove that the parent company has the obligation of care towards the casualties of the misdeed despite the fact that it isn't straightforwardly associated with the wrongful act. The UK courts use 3-level Caparo test in order to ascertain if the duty of care exists. Contrary to that, although the parent company does not owe a duty of care to the victims, the parent company may be held vicariously liable for the wrongful conduct of its subsidiary. In this case the decisive fact is the relationship between the parent company and subsidiary.

As regards the liability of the parent company for the criminal acts of its subsidiary, the author is of the opinion that holding the parent company liable is an efficient step to ensure full compensation to the victims and make such companies responsible. If it is said that the parent corporation cannot be held liable for criminal acts of the subsidiary, this can further encourage corporate irresponsibility. Companies can maintain strategic control from afar but strategically leave operations and safety mandates in the hands of local managers and the host government. This way, control can be maintained, while liability is evaded.

Suggestions Recommended
  1. The Court must first look into the amount of control, investment, ownership and supervision that a parent company holds over a subsidiary. If the parent company is found to have a certain level of control, supervision over the subsidiary, then the Court must hold the parent company liable.
     
  2. The Court must also ascertain if the business of the parent and subsidiary are relevant and if the parent company had prior knowledge about the wrongful acts being conducted and if it chose to overlook the wrongful acts, then the Court must hold the parent company liable.

End-Notes:
  1. Smith D., The Use Offshore Tax Heavens by the Top 100 Publicly Traded Companies, Offshore Shell Games, 2013.
  2. Adams v. Cape Industries plc, ([1990] Ch 433); Walkovszky v. Carlton, (223 N.E.2d 6).
  3. Tetiana Kravtsova, The Vicarious Liability Of Parent Company Liability For Its Subsidiary, Corporate Ownership & Control, Volume 14, Issue 1, Fall 2016.
  4. Richard H. Burgess, Liability Of Parent Corporation For Tort Of Subsidiary, Cleveland State Law Review, 2015.
  5. Sam Elson, Legal Liability of Holding Companies for Acts of Subsidiary Companies, Washington University Law Review, Volume 15, Issue 4, 2010.
  6. Van Dam C, European Tort Law, Oxford university Press, 2nd ed., Oxford, United Kingdom, 2013.
  7. Lubbe v Cape plc, ([1998] CLC 1559, 1568).
  8. Burns J.J, Respondent Superior as an Affirmative Defense: How Employers Immunize Themselves from Direct Negligence Claim, Michigan Law Review, Vol. 109 No.4, 2010.
  9. Miller N.P, An Ancient Law of Care, Whittier Law Review, Vol.26 No.2, 2004.
  10. Beau Baez H, Volunteers, victims and vicarious liability: why tort law should recognize altruism, University of Louisville Law Review, Vol. 48 No.3, 2009.
  11. Levmore S, Rethinking Comparative Law: Variety and Uniformity in Ancient and Modem Tort Law, Tulane Law Review, Vol.61 No.2, 1986.
  12. Neyers J.W, A Theory Of Vicarious Liability, Alberta Law Review, Vol.43 No. 4, 2005.
  13. Atiyah P.S, Vicarious Liability In The Law Of Torts, Butterworths, London, 1967.
  14. Hazeltine Corp. V. General Electric Co, (19 F. Supp. 898 (D. Md. 1937)).
  15. Johnston D, Limiting Liability: Roman Law And The Civil Law Tradition, Chicago-Kent Law Review, Vol. 70 No.4, Rev, 1995
  16. Ataner A, How Strict Of Vicarious Liability? Reassessing The Enterprise Risk Theory, University Of Toronto Faculty Of Law Review, Vol. 64 No.2, 2006.
  17. Taylor V. Standard Gas And Electric Co., (96 F. 2d 693, 704-705 (1938)).
  18. Garden City Co. V Burden, (186 F.2d 651 (1951)).
  19. Davis K.E, Vicarious Liability, Judgment Proofing And Nonprofits, University Of Toronto Law Journal, Vol. 50, No.4, 2000.
  20. Keating G.C, The Idea Of Fairness In The Law Of Enterprise Liability, Michigan Law Review, Vol.95 No.2, 1997.
  21. Smith B, Cumulative Reasons And Legal Method, Texas Law Review, Vol. 27 No. 4, 1948.
  22. United States v. Bestfoods, 524 Us 51 (1998)
  23. Coleman J.L, Risk And Wrongs, Cambridge University Press, 1992
  24. Giliker P, Vicarious Liability In Tort: A Comparative Perspective, Cambridge University Press, 2010
  25. Vandekerckhove K, Piercing The Corporate Veil, European Company Law, Vol.4 No.5, 2010
  26. Behind The Corporate Veil: Using Corporate Entities For Illicit Purposes, OECD Report On The Misuse Of Corporate Vehicles For Illicit Purposes (2001).
  27. Bainbridge, Stephen M., Abolishing Veil Piercing, SSRN Papers, 2000.
  28. Dobbyn, A Practical Approach To Consistency In Veil-Piercing Cases, 19 U. KAN. L. REV. 185 (1971).
  29. Kolvenbach Walter, European Reflections on Bhopal and the Consequences for Transnational Corporations, 14 INT'L BUS. LAW. 357, 1986.
  30. Kryvoi, Dr. Yaraslau, Piercing the Corporate Veil in International Arbitration, Vol.1, Global Business Law Review, (2011).
  31. Wormser Maurice, Piercing the Veil of Corporate Entity, 12 COLUM. L. REV. 496 (1912).
  32. Corporations: Parent's Liability for Subsidiary's Obligations, Michigan Law Review, vol. 35, no. 3, 2010.
  33. Sanger, Andrew, Crossing The Corporate Veil: The Duty Of Care Owed By A Parent Company To The Employees Of Its Subsidary, The Cambridge Law Journal, vol. 71, no. 3, 2012.

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers



Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


LawArticles

Section 482 CrPc - Quashing Of FIR: Guid...

Titile

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of th...

How To File For Mutual Divorce In Delhi

Titile

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Whether Caveat Application is legally pe...

Titile

Whether in a criminal proceeding a Caveat Application is legally permissible to be filed as pro...

The Factories Act,1948

Titile

There has been rise of large scale factory/ industry in India in the later half of nineteenth ce...

Constitution of India-Freedom of speech ...

Titile

Explain The Right To Freedom of Speech and Expression Under The Article 19 With The Help of Dec...

Copyright: An important element of Intel...

Titile

The Intellectual Property Rights (IPR) has its own economic value when it puts into any market ...

Lawyers Registration
Lawyers Membership - Get Clients Online


File caveat In Supreme Court Instantly